Frank McKenna on COVID-19, Canadian energy sector, and U.S.-Canada relations

Anthony Okolie recaps the news of the day including the latest COVID-19 updates, followed by Kim Parlee’s talk with Frank McKenna, Deputy Chair, Wholesale, TD Securities, about how governments have responded to the pandemic, challenges for Canada’s oil patch and global supply chains.

In a few minutes, Kim Parlee will be speaking with Frank McKenna, former Canadian ambassador to the US and deputy chair at Wholesale TD Securities for his take on the pandemic, government response, and US-Canada relations. But first, a quick wrap of today's market news.

The federal government's $73 billion wage-subsidy program for businesses kicks off today. Companies that qualify get a subsidy worth 75% of employees' wages retroactive from March 15 to June 6. Ottawa expects 1 million companies to apply to the program.

Meanwhile, the US Paycheck Protection Program, which got a fresh injection of more than $300 billion from Congress last week, is set to restart Monday morning. The initial program, which started with $350 billion, quickly ran out of money.

The US Federal Reserve meets Tuesday and Wednesday after lowering rates to near zero in mid-March. It's expected rates will remain there for the foreseeable future.

In just a few days, OPEC's commitment with Russia to reduce output will begin, but the price of crude is still under pressure. Oil slumped below $13 US a barrel as traders worry about a lack of storage.

Finally, Apple is delaying production of new iPhones coming out later this year by about a month as the coronavirus pandemic continues to hurt global demand.

- Frank, I want to start off with-- I mean, you're in touch, I know, with a lot of leaders, both in business and government. Where would you say we are in this pandemic right now?

- Well, I think we're probably in the middle. Every country is in a different place. China has moved through it. They're into the reopening stage. Austria's just starting to get into that stage, and I would say Germany is starting to get into that stage. We're at the stage now where we're cresting in the major population centers in Canada. I would say that the two extremities, the East Coast and the West Coast, are probably over that crest and closer to reopening.

- What would you say-- I mean, it's early. I think it's too early probably to start saying what lessons we've learned so far because we're in the thick of it. But forgive me, I'm going to ask it. What lessons do you think we've learned so far?

- Well, we were never truly ready, number one. And I speak for the planet, really, in that respect, and Canada would be included in that.

Secondly, I think we've learned a good lesson in that when the chips are down, our country comes together. People put their politics aside, and that's not true everywhere. So it's remarkable. As we did in the negotiations on free trade with the United States, people put their politics aside, and we spoke with one voice for the country. And I think that's been a good experience as well.

We've learned something else, and that's that our most vulnerable citizens have not been adequately looked after, and I'm talking about people in nursing homes. I would say that has been the biggest black mark in Canada. The fact that half of the deaths in the country come from people in institutionalized settings, that doesn't look good on our country. We need to learn from that.

- Frank, you talk about the senior population. It's heartbreaking how hard they've been hit by this. But, I mean, I think it also highlights that vulnerable populations right now-- there's a real disparity in terms of who is getting-- is able to take care of themselves in this situation.

- No, you're absolutely right. Certainly in the case of seniors who are institutionalized, we have to do a better job. As a country, we should do a better job.

But also, there are other vulnerable populations. Certainly the homeless are very vulnerable. People who have addiction issues would be very vulnerable. But also people with underlying health issues, and some of those are related to socioeconomic circumstances.

And in that sense, we see more obesity and more diabetes in certain cohorts within our population. And it's a lesson, as if we needed that, that the more we can do to take inequality out of our economy, the better it is. Because people who enjoy better socioeconomic circumstances enjoy better health, as a general rule.

- I want to shift, if I could, to-- and again, it may feel early to shift this conversation to it, about what happens when we kind of get into a new normal or a new abnormal, I guess as it were.

How do you think Canada is going to fare? We're hearing all these things about the supply chains are going to shift and there's going to be less globalization. And that has some serious implications for our economy. What are you hearing?

- Well, what I'm hearing is that anybody who thinks they know what's going on doesn't know what's going on, because none of us know what's going on. We just don't. For example, you could say that we've learned to live socially isolated and order our restaurant food in and watch Netflix. You could say that. Or you could say just the opposite, and that is that we yearn for the company of people. We yearn to go to a movie. We yearn to go to a restaurant, have a glass of wine, or be with our friends.

So I think when it's all over, there will be a bit of a reversion to the mean. I would suggest that people will want to resume their normal activities.

- What about the politics? Because some people were highlighting that some of things that were already in place are going to deepen. One person I was speaking with said you talk about soft rivalries between the US and China. Those look to be hardening. There's going to be some political shifts that'll come out of this.

- Yes, but that's not only related to the pandemic. This is pure deflection on the part of President Trump. Right now, he had been campaigning on great economy, therefore re-elect me as president. It's obvious. That's what we do. We try to make the economy the ballot question.

But the economy's gone all to heck, and so now he's trying to deflect blame to other parties. Barack Obama is all responsible for this or the governors or China or WHO or somebody. But China is emerging as the major enemy here, and I think he wants to run a campaign attacking China and making China the boogey man for the United States, which is easy to do because it is the boogey man for a lot of the United States. So that's a harbinger for poorer relationships with China in the next coming months until we get this election behind us.

- And Is It a harbinger for trade?

- Well, they've got a trade battle going on anyway. He's got $300 billion worth of tariffs on, or tariff on $300 billion worth of goods. They've delayed those for a few months as a result of pressure within the United States, but he's not letting go of that battle either.

And all of that is inefficient for the world. Even the PPE coming in had to overcome trade barriers in order to get in. That's just not right. You want to lubricate and grease the skids for international trade, not obstruct it. And, unfortunately, we're in a period where politics is trumping common sense.

- We saw some pretty ugly numbers. Even this morning I was taking a look at the cost-- or the price, I should say, of Western Canadian Select. And we had dipped negative, and then it rebounded back up. And what does this mean for Canada's energy sector which, to be clear, has helped power the Canadian economy for the past few years?

- Well, it has. And without it, we would lose a large amount of our growth and a large amount of the GDP, the revenues from GDP, which pay for all the other good things we want. So we've got two events happening simultaneously, a trade war that was started foolishly by Saudi Arabia and Russia. And secondly, we've got the pandemic which has crushed demand. So we have both a supply and a demand issue at the same time.

So right now we're in the worst of it where there are ships full of crude coming from Saudi Arabia. Prices are crashing. Storage tanks are full. And it's the very, very worst time. But it will gradually right itself as we get into the fall and demand picks up in China or other major economies of the world. As that comes back, we'll deal at least with the demand side of the equation, and the supply side of the equation should be dealt with as a result of the OPEC deal that was done. So I would say it may not bounce back to where it was, but we should see some coming off the bottom in the next few weeks.

Now in the meantime, there's some issues we have to deal with. We have to deal with the liquidity issues in our Canadian energy sector. And our government in Canada's going to have to do that, working with the banks. They've already dealt with some employment issues with the orphaned-well investment they're making and also methane-emission investments.

So these are some smart, strategic, environmentally friendly investments that will put a lot of people to work. But it does not solve the underlying liquidity issues facing the producers, and that's going to have to be dealt with in another tranche of government activity.

- There has been so much government activity everywhere in terms of trying to ease liquidity-- to your point, ease credit. I'm curious-- and again, I'm asking questions it might be early to ask-- but when you look out and you think about the amount of money that maybe is spent on health-- and not health as in the basic health that we're used to but more health data, health technology-- could we see a fairly significant shift in how governments choose to spend their money the next little while?

- Well, there will certainly to be pressure on for that. Certainly in the case of nursing homes, there will be a lot of pressure on governments to respond with better working conditions for the workers who are there and perhaps more intense staffing.

One of the tricks for government when they get through this is to bounce back to our normal levels of spending. Can we afford a one-time hit to our balance sheet as a country? I guess we can. Canada's in the best position of most industrialized countries in terms of debt to GDP. It would be like a company taking a one-time hit to its balance sheet.

But if you look at it that way, you also have to think in terms of the P&L. You do not want that hit to go through the P&L every single year. So you want to get back to your normal level of spending. And that's going to be hard to do, to go from $200 billion down to a more normal level, maybe $20 billion. It's going to take a lot of discipline with all of the stresses and pressures that are on government. But if we don't do that, then we're going to have a structural problem that may precipitate the next major crisis, which is going to be around leveraging and world economies.

- Frank, last question for you, and I'm going to ask you. You tell me. What should people be talking about, perhaps, that they're not talking about right now when thinking about this crisis?

- You know, we live in a highly integrated world. That's just fact. And something like a pandemic is going to sweep the planet because of those interconnections.

That's also true for climate. And I think just as we need to deal with this issue, we need to realize that climate change is an issue that is coming at us, whether we like it or not, and we have to deal with it.

We also have to deal with underlying stress issues in terms of world trade and the geopolitical machinations that are taking place on the planet. Within our own country, we've got to be able to grease the skids of interprovincial trade and take all of the friction out of the system in terms of permitting and getting things going.

We've got to be able to get crap done is what we have to be able to do going forward, especially in Canada, because world markets are going to be somewhat closed off to us for a while.

- Well, we do hope that we can get that going. Frank, it's always a pleasure. You take care, and we'll talk to you soon.